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Abstract

More than a decade since the vicious battle between Gucci and Bernard Arnault’s Louis Vuitton Moët Hennessy, this case remains an important case study in the failure of smart men to make measured choices. What led such wise men to fall prey to multiple mistakes and ultimately to the disintegration of negotiations? The work of the Harvard Negotiation Project and Robert Axelrod help elucidate the areas in which the characters involved could have acted differently. The consequences of the case highlighted the new interconnectedness of global financial and corporate markets. Today, luxury goods conglomerates cite this case as one of the most important in the history of fashion.

“As one would expect of a modern corporate conflict, the action in the battle for Gucci has taken place all over the world. If the protagonists have not been closeted with their lawyers in Amsterdam; they have been courting the fund managers who call the shots at Gucci’s institutional investors in London and New York; or making clandestine visits to Mr. Pinault’s opulent Parisian townhouse.”
– Alice Rawsthorn, Financial Times, April 1999

Introduction

The acquisitive world of high luxury often identifies itself through the lure of its mystery, selling an aesthetic that appears elusive and transcendent of the fray. The brutal battle between Louis Vuitton Moët Hennessy (LVMH), Gucci Group, and Pinault-Printemps-Redoute (PPR) in the late 1990s, however, was anything but above the fray. Sprayed out on tabloids across two continents, the battle for control of Gucci became a highly publicized saga between larger than life personalities.

The story plays out as a failure of smart men to make prudent decisions in negotiation. Ostensibly about the protection of the company he and creative director Tom Ford had rescued from the brink of collapse, Domenico De Sole adopted a maximalist position that escalated the negotiations to their bitter extreme. Perhaps lost in the fight were the principal interests of the company itself. Across the aisle, ruthlessly successful French businessman Bernard Arnault, both lauded and feared for his corporate acquisitions which turned LVMH into the world’s biggest luxury conglomerate, adopted an equally rigid position that led to his group ultimately losing out on Gucci. And finally, PPR chairman Francois Pinault, a keen businessman and a French powerhouse of his own, allowed the struggle for Gucci to devolve into a visceral power play between himself and Arnault – a play which he ultimately won, but perhaps at too high of a cost.

What led such wise men to fall prey to multiple mistakes and ultimately to the disintegration of negotiations? The answer lies within Robert Axelrod’s expansion of the concept behind bounded rationality – the notion that humans are constrained by the finite information and time they possess, and also by their often irrational human emotions. Instances of missed information as well as hubris, greed, and obstinacy were prevalent throughout this case, compelling each side to defect when they should have cooperated, and to punish when they should have displayed contrition. Building on this concept, the Harvard Negotiation Project’s work on ideologically rigid positional bargaining and the idea of a best alternative to a negotiated agreement (BATNA) is also effective in helping explain why an initially passive takeover attempt fragmented into a hostile showdown across courtroom benches.[1] The Gucci case was conducted through a sub-optimal strategy, as close connections and power dynamics caused both sides to make irrational choices.

The fascinating spectacle of the case aside, the battle for Gucci also had two vital implications. The first, and perhaps most important, was the larger implication for corporate takeovers amid the backdrop of a newly unified Europe. An Italian company traded on the Amsterdam and New York stock exchange, represented by American firms, run by an American and an American-Italian, and vied for by two powerful Frenchmen, the Gucci case was one of the first to reveal the realities of a takeover attempt in a truly globalized international context. This case illustrates the emerging confusion, complexity, and also advantages of this new cross-border reality that has spawned numerous case studies in business and law schools around the globe. The second implication is in relation to negotiation theory. An absence of cooperation in this story led both sides to an avoidable escalation. In line with the claims of the Harvard Negotiation Project and the work of Robert Axelrod, the case underlines the importance of interest-based negotiation that separates principles from the problem as well as the idea of a generous and cooperative iteration of game theory known as the Tit-for-Tat strategy (TFT).

This case study seeks to address the failure of the actors involved in the negotiations over Gucci and assess the broader implications on European corporate takeovers and negotiation theory. It is divided into five sections. Following this introduction, the principle actors and timeline that formed the case will be discussed. A section discussing the causal instrument will follow. The implications section will then expand on the broader consequences of the case study. Finally, the conclusion will briefly summarize the story.

The Story: Actors and Timeline

Italian born Domenico De Sole initially made his name upon graduation from Harvard Law School at the Washington D.C. firm of Patton, Boggs, & Blow.[2] In 1984 he became president of Gucci America, lured to the position through his relationship with the Gucci family as his clients.[3] De Sole habitually butted heads with Maurizio Gucci, who had inherited the largest share in the company his grandfather had established. A decade later, De Sole assumed the role of chief operating officer in the wake of Maurizio’s inauspicious exit. A year after that, De Sole was tapped to be president and chief executive officer as the company prepared to go public under the Bahraini investment group Investcorp.[4]

De Sole inherited a company mired in poor management, ostentatious overspending, and family feuding that had ultimately driven the company to the verge of bankruptcy in 1993. A luxury brand founded in Tuscany in 1923, Gucci initially burgeoned on the craftsmanship of its supple leather items assembled by artisan hands in Florence. By the mid 1980s, that storied heritage had diffused into mediocrity as Maurizio and the rest of the Gucci family had sought to generate more profit by mass-producing lower quality goods and licensing image rights to low quality manufacturers and retailers.[5] Investcorp, having already acquired half of the company’s shares, ultimately wrested full control by buying out Maurizio in 1993. Two years later, a man contracted by his indignant ex-wife, Patrizia, gunned Maurizio down execution style in Milan.[6]

Investcorp’s subsequent investment into De Sole paid off immediately. As chief executive, De Sole promoted the young and ambitious Tom Ford to creative director and vested in him full creative control of the brand. From this vantage point, the Texas native and New York Parsons School of Design graduate in architecture gave new life to the company. Ford immediately reduced licensing rights to Gucci-operated doors and high-end retailers. He reinvented the label, evoking the sexy-chic aesthetic that defined the brand in the 1950s and 60s.[7] Slim and dark silhouettes, risqué marketing, and sleek packaging reinvigorated Gucci and galvanized a once decreasing customer base.[8] De Sole, for his part, retook control of distribution and image rights for the brand. He traveled to meet disaffected Florentine artisans in person to rekindle the special relationship that once produced Gucci’s renowned quality.[9] The ensuing result was a more efficient production line, a more transparent and conscious management team, and a generally more well run Gucci.

By 1995, when Investcorp decided to take the company public, Gucci’s earnings had surged from a net loss of $22 million two years prior to a staggering $1.2 billion valuation.[10] To put the turnaround in an ironic perspective, Bernard Arnault who would eventually launch an almost $9 billion bid for the company in 1999, refused to buy it for $350 million in 1994. By the end of ‘94, the Compagnie Financière Richemont luxury group could not meet Investcorp’s $950 million price tag, which was offered before the group decided to go public.[11] The figure below displays Gucci’s incredible growth in sales in the subsequent years from 1994 (limited to data up to 2005).12

Gucci’s prosperity in the world of fashion, however, veiled its susceptibility to a takeover. Investcorp’s initial public offering had structured the company to be assumed by a major stakeholder.[13] During the period from the initial floating of its stock to the eventual takeover battle, Gucci operated as the only Italian company ever without a principal shareholder to which it was obliged to answer.[14] In 1996, De Sole, exploring options on how to defend against a potential takeover, concocted an American style poison pill dubbed Project Massimo – which when triggered in the instance of a takeover attempt would flood new company shares into the market and dilute existing shares, making a potential majority takeover more expensive.[15] Shareholders would ultimately strike down the proposal, but the failed effort underscored Gucci’s vulnerability to a takeover. A vibrant and growing company with a bright future, it was a matter of time before bidders came knocking. It is believed that during this period Bernard Arnault first began to acquire Gucci shares.[16]

Arnault was the second richest man in France, having first acquired his wealth by virtue of his family’s real estate empire, and then by slowly building LVMH into a luxury conglomerate. He assumed full control of the group after a separate battle in the late 1980s over Louis Vuitton and Moët champagne.[17] At 35 he bought Boussac, a French textile company that included Christian Dior. He went on to rattle France’s otherwise traditional fashion industry, naming young designers John Galliano at Dior, Alexander McQueen at Givenchy, Marc Jacobs at Louis Vuitton, and Michael Kors at Céline. At first hated and criticized for his ‘American’ style of aggressive corporate raiding and ruthless decision-making, Arnault eventually won the begrudging respect of the French public for his continued success and LVMH’s continued growth.[18]

Before Arnault’s eventual move on Gucci, however, it was Prada’s Patrizio Bertelli that struck. In June 1998, Bertelli emerged with a surprising 9.5% purchase of Gucci shares.[19] Unexpected and sudden, this materialized the Gucci team’s worst fears. De Sole met with Bertelli, who contended that the two companies should work together and forge a dynamic partnership. De Sole, surprised and perturbed, responded that he, unlike Bertelli, was the C.E.O of a public company and had shareholders to answer to.[20]

At this time Morgan Stanley advisor to Gucci Michael Zaoui conveyed his belief to De Sole that they should find a way to turn Bertelli into an ally, instead of simply rejecting his offer. De Sole objected, believing the act of reaching out would portend weakness. De Sole’s nearsighted failure to somehow turn Bertelli into an ally would come back to haunt him. “I wish I had,” De Sole would later say. “In life you make a lot of mistakes.”[21]

On 6 January 1999, it publicly emerged that Arnault and LVMH had acquired a 5% stock in Gucci. Arnault was adamant that it was a passive stake and he had every intention of letting Gucci remain independent. De Sole and Gucci managers, however, knew this was the moment they had dreaded most. As they deliberated on their options, they were stunned again as LVMH gobbled Prada’s shares and put itself at almost 15% ownership.[22] As De Sole began a desperate and futile search for a white-knight investor to save the company from Arnault’s grasp (9 firms denied his proposal), Arnault increased LVMH’s stake to 34.4% by 26 January.[23] Meanwhile LVMH refused to make an outright offer for Gucci, something required by French but not American financial laws upon purchasing this percentage of a company’s shares.[24][25]

Defenseless and vulnerable, yet fully committed to a war of attrition, De Sole refused to give in to Arnault’s request for seats on Gucci’s board of directors. Running out of options though, he finally agreed to meet Arnault face to face. On the evening of 22 January, they met for the first time in the Paris offices of Morgan Stanley. Arnault maintained that his intentions were friendly and that he wanted Gucci to operate independently under LVMH control. De Sole maintained that Arnault should stop the creeping takeover or make a full tender offer.[26] The 70-minute meeting was cordial, but the two sides seemed as entrenched in their positions as ever.
Five nights later De Sole returned with a proposal. LVMH reduces its stake to 20% and allows Gucci to operate independently, and in return Arnault would be granted two seats on the board. Arnault promised to consider the offer, but on 8 February he rejected it outright. Arnault would not concede, operating under the assumption that he had much more leverage than Gucci; there was seemingly no way they could prevent his creeping control of the company.[27]

De Sole and his team at Morgan Stanley tried one last time to convince Arnault to buy the company outright or come to a standstill agreement on a board member swap deal. The price tag was set at $85 a share – a steep price but still fair given Gucci’s strength and long term outlook under Ford. After vacillating back and forth, Arnault refused the offer and also backed out of any potential standstill agreement, pushing De Sole and Gucci to their emotional limit.[28] The next day, on 18 February, Gucci employed a creative and perhaps controversial last resort option – an employee stock ownership plan (ESOP) they had kept in their back pocket. The ESOP would cost Gucci no money or effort, as it was a Trust set up for company employees. Under it, employees would receive a zero interest loan from the company to buy newly issued shares. The Trust was granted the right to purchase up to 37 million newly issued shares, of which it instantly bought over 20 million.[29] The Trust diluted every stockholder’s share (but not earnings, as the shares did not pay out dividends). The Trust suddenly owned 25.6% of the company, and LVMH was diluted to 26%.[30]

Shocked, incensed, and scrambling, LVMH immediately cried foul and filed a lawsuit to halt the maneuver they saw as a declaration of war.[31] What Pierre Godé, Arnault’s confidant and lawyer, and the rest of LVMH’s team had missed was a huge loophole. They believed that in accordance with New York Stock Exchange rules, no company could issue new shares that amounted to more than 20 percent of its capital. However, they overlooked the absence of such a law in Amsterdam, where Gucci was listed and whose laws they were playing by in this situation.[32] In the ensuing court hearings, Gucci’s employees, represented by the infamous CGIL labor union, showed up in support of De Sole and Gucci.[33] The Dutch court decided to freeze the ESOP, but it also froze LVMH’s voting rights, granting Gucci invaluable time and a marginal moral victory.

The stroke of improvised genius by Gucci’s Dutch and American lawyers and the glaring miss by LVMH granted Gucci precious momentum. Their valiant fight caught the eye of France’s richest man, PPR chairman Francois Pinault. Pinault’s group was formalizing a strategy to break into the luxury industry, and they believed Gucci could be their opportunity. After multiple, secret meetings between Pinault and De Sole and Tom Ford, as well as between C.F.O Robert Singer and top figures at Pinault’s holding company Artemis, a tentative deal was struck. PPR would buy 40% of Gucci and simultaneously buy Sanofi Beauté (ironically Arnault had passed up on buying them months earlier), a group within which Yves Saint Laurent operated. Pinault’s condition was that Ford and De Sole stay on and not only run Gucci, but head a new multiband conglomerate to rival LVMH.[34] The development was nothing short of stunning. Gucci seemed to go from losing control of the company to becoming part of a powerful group run by De Sole and Ford in a matter of weeks.

Predictably LVMH refused to go down without a fight. They sued to stop the takeover. Meanwhile Arnault, whose control was reduced to a mere 20.7%, simultaneously launched an audacious $8.7 billion ($85/share) bid to buy the company outright. Gucci refused and asked for $88 per share, at which LVMH balked.[35] After a tiresome and publicized few weeks in court during which neither side hid its disdain for the other, the Amsterdam court upheld Pinault and PPR’s purchase of Gucci’s shares (See chart below).[36] Although a clear victory for PPR and Gucci, LVMH still owned a fifth of the company and promised to be a nuisance as a minority stakeholder. After another two years of bitter disagreements and an arduous back and forth, the three parties came to a termination agreement on 10 September 2001. It entailed PPR would buying out all of LVMH’s shares over three years. An initial $812 million would acquire 8.6 million shares at $94 per share. PPR would buy the remaining minority shares, including LVMH’s last 12%, in March of 2004 at a set price of $101.50.[37] Gucci agreed to pay a premium dividend to all shareholders except for PPR. In turn LVMH, which actually made a hefty profit from its shares, agreed to drop all legal charges against PPR and Gucci.[38]

Causal Mechanism: Entrenched Emotions and Constrained Information

The dragged out legal battle between Gucci and LVMH, which became known as the ‘Battle of the Handbags’ in the media, never should have escalated to such a bitter conclusion. Understanding the emotional attachment of each character to his position, however, makes it easier to understand why maximalist attitudes prevailed. Domenico De Sole and Tom Ford’s understandable connection to the company they rescued implicated that they were never going to consider letting it go without a struggle.

Bernard Arnault and his team at LVMH acted in hubris, dictating terms because of their perceived leverage. Their goals and intentions were always ambiguous and a sense of trust was never established. Finally, Francois Pinault and PPR’s interjection that ostensibly saved Gucci and pitted him against Arnault makes more sense considering that the two were the richest men in France and already competitors across multiple sectors. These factors, irrational and facile as they were, created an unbridgeable gap between the parties that made cooperation impossible. The gap was only exacerbated by the complexity of the globalized financial context in which the story played out – with both sides suffering from a lack of complete knowledge regarding the rules by which they were playing.

The Harvard Negotiation Project’s (HNP) work on negotiation theory is helpful for understanding why things deteriorated so rapidly. In “Getting to Yes,” Harvard professors William Ury and Roger Fisher outline the ideological rigidity that often leads to failed negotiations. Their idea of positional bargaining entails that when negotiators lock into a struggle over set positions, they often tend to become so committed to that specific outcome that it becomes a part of their identity, leading to a zealous desire to achieve it no matter the consequences. It becomes more of a contest of ego and will than of compromise and efficiency.[39] The authors state, “The more you clarify your position…the more committed you become to it. The more you try to convince the other side of the impossibility of changing your opening position, the more difficult it becomes to do so. Your ego becomes identified with your position.”[40] Judging by De Sole’s actions from the time he tried to concoct a poison pill until the day he announced the partnership with PPR, his position was firm and entrenched.

For Arnault, beyond the egoism involved in his battle for Gucci and eventually against Pinault, it was his perceived leverage that probably led him to overestimate his strength. Ury, Fisher, and the rest of the team at HNP define leverage as the best alternative to a negotiated agreement (BATNA). In other words, if an actor is to defect from negotiations or if they collapse, what is their outcome? Leverage or “the relative negotiating power of two parties, depends primarily upon how attractive to each is the option of not reaching agreement.”[41] Amid negotiations with De Sole, Arnault knew that his alternative to a standstill agreement was to continue buying shares of Gucci and increase his power without any particular impediment. His confidence based in this reality led him to push Gucci around and renege on meetings and proposals multiple times. He once even asked Gucci in almost taunting fashion what salient reason they had for him to consider their proposal.[42] Until Pinault and PPR came along later, Gucci had no such luxury.

One of the many things Arnault missed, however, was that De Sole and Tom Ford’s commitment to their company meant that their calculations were not necessarily logical or rational. This is understandable through the idea of perceived fairness. The HNP team explains research that suggests an actor’s emotional perception of the fairness of a deal will often dictate their willingness to accept it, even if they have no leverage or alternative solution.[43] This was true for Gucci, who chose to defect and risk greater losses instead of entering into any sort of agreement with LVMH, who they viewed as a rival pushing them around.

Beyond the emotional attachments that made negotiation so difficult in this case, Robert Axelrod’s work on cooperation and bounded rationality is equally useful in understanding the mistakes made by either side. Axelrod’s development of the Tit-for- Tat theory in the Prisoner’s Dilemma in the 1980s revealed a hugely effective wrinkle: initial cooperation followed by mirroring the other player’s moves repeatedly (reciprocity) builds trust over time and reaps better results for both sides. In his seminal “The Evolution of Cooperation,” Axelrod explains:

Don’t be envious, don’t be the first to defect, reciprocate both cooperation and defection, and don’t be too clever… We are used to thinking about competitions in which there is only one winner… But the world is rarely like that. In a vast range of situations, mutual cooperation can be better for both sides than mutual defection. The key to doing well lies not in overcoming others, but in eliciting their cooperation.[44]

It is not clear who defected first in the Gucci case, but regardless both sides continuously acted without cooperating, leading to increasing hostility and deteriorating trust. Lack of transparency was a key issue as well. Gucci always believed that Arnault simply wanted enough ownership of the company to control and hinder its growth, as Gucci had emerged as Louis Vuitton’s main competitor.[45] Even financial analysts were somewhat confused by Arnault’s rabid ambition to buy a company with whom his main jewel competed with in the same market.[46] For its part, Gucci never seriously heard Arnault out, immediately searching for defensive delay tactics until it could catch a break and find an escape route.

The lack of trust was made even starker by the complexity of the financial laws of the case. Axelrod argues that actors in interaction are only rational up to the limited information and time available to them.[47] Bounded by the constraint of the information they had, both sides overlooked loopholes exploited by the other. Arnault was able to exploit the lack of a French law in the U.S. that requires a shareholder to make a tender offer on a company once it exceeded 34% control.[48] This allowed him to sit back and continue a creeping takeover. The more blatant miss came from LVMH’s team, whose lawyers overlooked the fact that Gucci was designated as a foreign company and was subject to Dutch rules – rules that allowed the arguably tide-turning ESOP to take place. The emotional biases and information constraints that led to both sides defecting and negotiations breaking down in this case had huge implications for finance and negotiation theory.

Implications

The most important implication in the failure of Gucci and LVMH to cooperate was that it highlighted the new complexity of a mongrelized corporate financial world. A Wall Street Journal article covering the case at the time reflected, “The brewing battle for Gucci is emblematic of the New Europe that is taking shape with the launch of the common currency and the globalization of industry: two Frenchmen squaring off for control of a Dutch-based Italian company run by a U.S.-educated lawyer and an American designer, and advised by London-based American investment bankers.”[49]

This case set the precedent for a host of mergers in the European Union and materialized a new globalized reality for finance: receding barriers, international investors, and cross-border rules. In the same year Banque National de Paris (BNP) bid $38 billion for Société Générale and Paribas and Olivetti bid $60 billion for Telecom Italia.[50] Vodafone AirTouch, Mannesmann, Iberpistas, Acesa, FAG, Fiat, and Montedison all were involved in similar hostile takeover attempts in the same time frame.[51] Fordham Journal of Corporate and Financial Law reflected on the new reality in a 2003 entry,
“Barriers between domestic economies are being reduced… These changes represent a movement toward a market-oriented model. Specifically, European corporate finance is beginning to rely less on concentrated stockownership; investors are…becoming more diverse.”[52]

As courts across Europe struggled to litigate emerging cases and manage nationalistic tendencies, the European Union sought to put a regulatory framework in place. Amid the maze of confusion, shareholders often took the worst hits. Donald Meltzer, head of European mergers and acquisitions at Credit Suisse First Boston contemplated in 1999, “If Gucci had conducted the situation as a full and fair auction for the stake and the accompanying governance rights, or made the transaction with Pinault conditional on shareholder approval, Gucci shareholders would have ended up with a higher value.”[53] As it stood at the time, Dutch law required neither measure.

In 2003 the European Parliament finally passed the EU Takeover Directive, a framework designed to protect shareholders and provide a semblance of cross-border uniformity in dealing with mergers and acquisitions. Private interests and nationalistic jostling for influence meant that the Directive was diluted and left many issues unresolved, yet it was a monumental first step in better regulating cases like Gucci vs. LVMH.[54]

The second implication of this case beyond the world of finance is in regards to negotiation theory, and the importance of building trust and seeking mutual gain. The failure of Gucci, LVMH, and PPR to find a friendly way to resolve the ordeal had adverse impacts on all three parties. LVMH, of course, lost out on gaining the control it sought. Already debt-laden PPR eventually had to pay a steep price to finance its purchase of the entire company – which became more costly due to the provision in the final termination agreement that mandated it to buy all remaining minority shares at a set price of $101.50. This price was agreed upon a day before the 9/11 attacks on the Twin Towers sent the luxury goods industry into a multi-year free-fall as demand shriveled.[55]

Tom Ford, Domenico De Sole, and Robert Singer succeeded in saving their company from Arnault, but their relationship with Pinault was not exactly a success. Ford and De Sole would eventually leave in 2004, citing differences over creative autonomy with Pinault.[56] Meanwhile, the lack of cooperation and the prevailing mistrust hung over the parties when again, in September 1999, they engaged in another bidding war over Fendi (LVMH won this round).[57]

The implications of this case created huge ripples across the fashion, finance, and law industries. Its importance still echoes today as it is readily studied in business and law schools for its financial, legal, and negotiation nuances.

Conclusions

More than a decade on from the vicious battle between Gucci and Bernard Arnault’s Louis Vuitton Moët Hennessy, this case remains an important case study in the failure of smart men to make measured choices. The work of the Harvard Negotiation Project and Robert Axelrod help elucidate the areas in which the characters involved could have acted differently to build trust and elicit mutual cooperation. The consequences of the case, meanwhile, highlighted the new interconnectedness of global financial and corporate markets. Today, luxury goods conglomerates, which proliferated after the PPR-Gucci merger, cite this case as one of the most important in the history of fashion. Tom Ford today runs his own namesake label, headed by Mr. De Sole. LVMH and PPR (since renamed Kering) remain competitors to this day, continuing to write chapters in the book that began with a spectacular bang in 1999.

Notes & References

‘Passive’ depended on whom you asked. Bernard Arnault maintained till the end that his intentions were not aggressive. De Sole and Gucci, however, perceived it as hostile from the start. Nevertheless, the initial engagement was in no way as hostile and antagonistic as the way the case progressed and ultimately settled.

In a game of cat and mouse, Arnault watched Gucci closely, buying more stock every time they reached out to a potential white knight.

Gucci would have most likely entertained a tender offer, it would have given shareholders a premium for the change in ownership, and it would have signaled Arnault’s real interest in owning the company. De Sole, Ford, and Singer might have entertained actually working with Arnault in that scenario. But Arnault had no interest in an outright bid.

Samine Joudat, a first year M.A. candidate at SAIS, was born in Iran and raised in California. He is a Middle East Studies concentrator focusing on emerging markets. A 2013 graduate of UC Berkeley with a degree in political science and international relations, his research interests include the influence of Western post-Enlightenment thought on Iranian politics and renewable energy.